According to economists, the coming months will see the Reserve Bank of India (RBI) concentrate on hiking the interest rates in a tightening cycle that is expected to be relatively short. Therefore, it is very much possible that by the beginning of next year, the repo rate will hit its terminal level. On May 4th, the Indian central bank had surprisingly hiked up the interest rate. Last month, price pressures had reached a high of eight years and this pushed Monetary Policy Committee members to demand a further increase in interest rates to combat them.
It had previously been predicted that the RBI would give its key policy rate a boost in the next four meetings of the MPC by almost a 100 basis points. Shaktikanta Das, the governor of the Indian central bank, said that it was a ‘no-brainer’ that they would hike up the interest rate again in the policy meeting scheduled on June 8th. The bank had increased the interest rate to 4.40% in May, which was an increase of 40 basis points. However, it was unclear as to what the new rate would be with forecasts predicting an increase between 25 and 75 basis points.
Market experts had expected the repo rate to reach 5.15% or more in the next quarter, which would have brought it to the same level it had been before the coronavirus pandemic struck. The median had showed that the rate would end the year at somewhere around 5.50%. This would have meant an increase of 110 basis points higher than what it is now. Economists said they expect most of the increases in interest rates are expected in this year and the cycle of monetary policy tightening to come to an end in April next year.
They believe that the urgency of hiking the interest rate would go down from the start of the fourth quarter. The tightening policy for the next year is expected to be significantly more subdued, as predictions show that the first half would only see an increase of 40 basis points. Experts said that the RBI had been a little behind times when it comes to dealing with inflation and figuring out interest rates. Even now, it appears that they are not taking the price pressure very seriously. Inflation is not going to come down any time soon due to high global food and energy costs.
As far as the economy is concerned, the prospects look rather disappointing. Last quarter saw the growth in GDP slow down to the weakest it has been in a year, which makes it the third slowdown consecutively. As the RBI has always given greater priority to growth as opposed to inflation, it is possible that the bank could keep interest rates steady until it decides to raise them abruptly in order to end the current tightening cycle before the year is complete. Most believe that the terminal rate will be somewhere between 5.15% and 6.50%.